Discounts and allowances

Overview

Discounts are reductions applied to the basic sale price of goods or services. Allowances against price may have a similar effect. Discounting practices operate within both business-to-business and business-to-consumer contexts. Discounts can occur anywhere in the distribution channel, modifying either the manufacturer's list price (determined by the manufacturer and often printed on the package), the retail price (set by the retailer and often attached to the product with a sticker), or a quoted price specific to a potential buyer, often given in written form. There are many purposes for discounting, including to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage distribution channel members to perform a function, or to otherwise reward behaviors that benefit the discount issuer. Some discounts and allowances are forms of sales promotion. Many are price discrimination methods that allow the seller to capture some of the consumer surplus.

Trade discounts

Trade discounts are deductions against the list price or catalogue price which are charged by a wholesaler or manufacturer to a retailer or supplier who then deals with the end customer. The discount then enables the retailer to charge the end customer the list price and cover its own costs/profit.

Prompt payment discount

Cash discounts are reductions in price given to the debtor to motivate the debtor to make payment within specified time. These discounts are intended to speed payment and thereby provide cash flow to the firm. They are sometimes used as a promotional device. A UK survey undertaken by the British Chambers of Commerce found that 13% of UK businesses offered prompt payment discounts (PPDs).

Examples

2/10 net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive a 2% discount if they pay within 10 days of the invoice date. 3/7 EOM - this means the buyer will receive a cash discount of 3% if the bill is paid within 7 days after the end of the month indicated on the invoice date. If an invoice is received on or before the 25th day of the month, payment is due on the 7th day of the next calendar month. If a proper invoice is received after the 25th day of the month, payment is due on the 7th day of the second calendar month. 3/7 EOM net 30 - this means the buyer must pay within 30 days of the invoice date, but will receive a 3% discount if they pay within 7 days after the end of the month indicated on the invoice date. If an invoice is received on or before the 25th day of the month, payment is due on the 7th day of the next calendar month. If a proper invoice is received after the 25th day of the month, payment is due on the 7th day of the second calendar month. 2/15 net 40 ROG - this means the buyer must pay within 40 days of receipt of goods, but will receive a 2% discount if paid in 15 days of the invoice date. (ROG is short for "receipt of goods".)

Taxation treatment

Before 2014, suppliers in the United Kingdom were permitted to add VAT to the discounted price, even if payment was not made within the discount period and therefore due in full. This provision generated a shortfall in taxation revenue and also meant that UK practices were not in line with the EU's VAT Directive of 2006, which specified that value added tax was to be levied on the actual price paid. Proposals were put forward in the budget of 2014 to amend the UK's taxation law in this respect. In the telecommunications and broadcasting sectors (where there was no obligation to provide a VAT invoice), the law was amended from 1 May 2014, while in other sectors of the economy, the change was effective from 1 April 2015.

Preferred payment method discount

Some retailers (particularly small retailers with low margins) offer discounts to customers paying with cash, to avoid paying fees on credit card transactions.

Partial payment discount

Similar to the trade discount, this is used when the seller wishes to improve cash flow or liquidity, but finds that the buyer typically is unable to meet the desired discount deadline. A partial discount for whatever payment the buyer makes helps the seller's cash flow partially.

Sliding scale

A discount offered based on one's ability to pay. More common with non-profit organizations than with for-profit retail.

Forward dating

This is where the purchaser doesn’t pay for the goods until well after they arrive. The date on the invoice is moved forward - example: purchase goods in November for sale during the December holiday season, but the payment date on the invoice is January 27.

Seasonal discount

These are price reductions given when an order is placed in a slack period (example: purchasing skis in April in the northern hemisphere, or in September in the southern hemisphere). On a shorter time scale, a happy hour may fall in this category. Retailers organize big discounts on almost every season in order to make space for new inventory for the upcoming season. Generally, this discount is referred to as "X-Dating" or "Ex-Dating". An example of X-Dating would be:

3/7 net 30 extra 10 - this means the buyer must pay within 30 days of the invoice date, but will receive a 3% discount if they pay within 7 days after the end of the month indicated on the invoice date plus an extra 10 days.

Spaving

Spaving (a portmanteau of "spending" and "saving") is a marketing strategy in which consumers are encouraged to spend money to gain access to savings. Spaving offers include free shipping at a certain threshold and "buy one, get one free" deals.

Bargaining

Bargaining is where the seller and the buyer negotiate a price below the original selling price.